PEER COMPANIES

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PEER COMPANIES

Talking to Chakri Lokapriya, CIO & MD, TCG AMC, says SBI’s capital is probably the strongest among not only among all PSU banks but also in comparison with an ICICI or an Axis Bank.

Edited excerpts:

Every time I think that there is light at the end of the tunnel for PSU banks, I just realise that the tunnel is only getting darker and darker.You are right. If the RBI as well as the government keeps changing the goal post and coming out with a new set of regulations, that creates a huge amount of uncertainties because 180 days is not just about enough time. For true business reasons, if there is a downturn, there is a downturn. It sometimes needs more time. So, against the current backdrop which means that all the companies which were going to be reclassified and coming out of NPAs under what was the SDR and previous set of regulations, now will continue to remain NPAs and not even that it is now probably estimated another 3% or 4% of companies will become NPAs as a result of the new RBI regulations. Against this backdrop, instead of NPAs going down, the opposite is likely to happen and that means NPAs will continue to go up for PSU banks.

If the messaging from RBI is a very straight forward clean up your house because banks have not been forthright in showcasing their books in a very transparent manner. So, Reserve Bank of India somewhere has been forced to come out with this new policy. If the tone or if the communication to the market is very simple that NPAs will go higher, how come there is no panic in wholesale banks? In the morning SBI was flat, ICICI Bank was flat. With this kind of news, these stocks should have fallen apart.Additionally, what is going to happen is probably another 3% or 4% is going to become NPAs. The NPAs in the system is probably about 10% or 11%. Now that number is likely to become 13%. Against this backdrop, the valuations of the underlying companies are very undemanding. It is not going to change much in terms of valuations and therefore stock prices are falling a whole lot. What is likely to happen is because of that, capital availability is going to become tighter for corporates and various infra companie. All the steel companies, which were hoping that the new regulations help them become performing assets today have a new problem on their hands which is they will continue to remain NPAs for a longer period.

That indeed is the case, the only issue is what do you do in the interim? Do you stick with some of the bigger names? SBI before it reported its earnings was seen as perhaps the safest bet within PSU banks but after SBI’s numbers, a shadow of doubt has come in on whether or not one can trust PSBs at all? With today’s news on PNB’s fraudulent transaction of $1.77 billion, you can either blame the company or blame poor lending culture. The very core. the basic trust seems to have been shaken. Does it mean stay away from PSU banks completely?We would now reduce our weights and go slightly underweight on PSU banks. So, yes the answer is stay light on PSU banks but within the overall context, SBI is still a very important component in the banking system and one cannot ignore SBI in totality and the numbers were okay.

NPAs went up a little bit higher than expected when SBI reported its numbers but the capital is probably the strongest among not only among all PSU banks but also in comparison with an ICICI or an Axis Bank. As far as PNB is concerned, those are one of those business hazards which keep coming up and this roughly Rs 10,000 odd crore is not such a big deal because this is something which companies do provide for that occasional things do happen like this.

Another theme that you have been liking in the market beside L&T, which you briefly touched upon is Nagarjuna Infrastructure and PNC Infrastructure. What attracts you to these names because some of these infra plays have already had a brilliant run in all of 2017. Even from the lows of last two weeks, some of these stocks have bounced up quite nicely.Yes indeed and after the LTCG was announced. all these stocks cracked about 15-20%. Today Nagarjuna Constructions reported very strong earnings, up about 70 odd percent. Their order backlog has accelerated and is now about 55%. New order inflows have been exceptionally strong and valuations are not demanding at this point in time given that you are in an extremely early stage of infra recovery and most of this is a government push on getting roads and EPC contracts in the next 12 to 18 months. So from that perspective, both Nagarjuna or PNC will benefit both from the acceleration in road activity as well as in infra projects.

How would the government’s thrust on irrigation benefit the usual suspects -- Jain Irrigation, Finolex and Kisan Mouldings. What do you like about this stock?Irrigation is clearly a number one thrust for the government and also in this year. irrigation also creates a lot of employment in the rural areas and so the government has huge plans in rolling out in mechanising both micro irrigation as well as irrigating large tracks of farm land. So against this backdrop. various equipment suppliers to the irrigation industry will do good. Jain Irrigation is by far the leader in this space and also company specific. The company has been reducing its debt, making itself a slightly cleaner balance sheet than it was before so you have both business momentum as well as policy momentum which is helping the company.

Kisan Mouldings on the other hand is similar to Jain Irrigation, a much smaller one and that but the company has been executing well. This is a company which produces the Kisan brand and has a very strong brand recall amongst the farmers. The company was a loss-making company, has been divesting some of its non-core assets, selling some land parcels, strengthening its balance sheet. They have done a preferential offering. They have hired some of the best brand ambassadors who are going to be promoting the product.

Against this backdrop, you will see an acceleration of earnings not only because of the company specific activities but also given the policy thrust in the irrigation space and especially in big states like Maharashtra, Gujarat which are big irrigation states.

Do you think the market should pay more attention to the move in Tech Mahindra within the IT basket and when we typically talk about the revival in IT earnings in the spot light, it is typically the more talked-about names like Infosys, TCS, HCL Tech but it is really Tech Mahindra’s numbers and its price action that caught my attention a few days ago. Of course, in the market mayhem the stock came down but in bits and starts, things are changing for Tech Mahindra and that needs to be highlighted.Yes indeed! This particular quarter has been fairly good for the IT companies and they were coming off a period of 2017 of very low expectations going on for this year and this year’s US tax reform is going to increased IT spend by the US corporates therefore bodes well for the traditional Indian IT services business. Tech Mahindra’s numbers have been better than expected and valuations for the entire pack is extremely undemanding.

These are not going to be multibaggers stocks from here but they will make you this kind of an annuity 15% plus kind of return annually which is a very good number in the current context because they are not subject to any of the Indian rules and regulations and macroeconomic environment but the US and developed markets which are looking extremely strong.

The world normally takes notice of what Ray Dalio does because his track record speaks it. If Ray Dalio is bearish on Europe, that means he is not very optimistic on the world.Two things – one is if you look at the US corporate earnings have been very good and it was after a long time. In fact, it was not just earnings improvement but also revenue improvement in the S&P 500 and mind you, the tax cut has not even kicked it. It kicks in only some time in 2019 but sales improvement has happened in the US.

As you go into some time in 2019, some of the businesses which are there in the EU, in Ireland which all had tax advantages, which will now come back into the US which is very good from US corporate earnings perspective and not so good for some of the EU developed market perspective. But EU itself is more manufacturing intensive versus let us say the US and they are recovering well. It is incremental shift but from that perspective. EU is weaker or rather less strong than the US.